Living standards: recent trends and future challenges

This briefing note examines what has been happening to living standards and unpicks the main reasons for these trends. It looks both at living standards on average and at the considerable variation in trends across different parts of the population.

The coalition government took office after the Great Recession, just as household incomes were beginning their subsequent and inevitable decline. It would be misleading to attribute all trends in living standards that occurred before May 2010 to Labour and all trends thereafter to the coalition.

We project that real (RPIJ-adjusted) median household income is at around the same level in 2014–15 as in 2007–08 (before the financial crisis), and about 2% below its 2009–10 peak.

Having continued to rise slowly during the recession itself, real median household income then fell by 4.0% from peak in 2009–10 to trough in 2011–12, driven by falls in workers’ pay and in employment. This was a larger peak-to-trough fall than occurred around the early 1990s recession (1.2%), but smaller than in the early 1980s (5.7%).

Since then, employment has recovered strongly but real pay, and hence average income, has not. This is consistent with the absence of productivity growth since 2011. Meanwhile, the coalition has implemented a large package of tax and benefit measures taking money away from households in response to the structural budget deficit caused or revealed by the crisis.

The slow recovery in household incomes has been more remarkable by historical standards than the peak-to-trough fall. We project that median household income grew by just 1.8% in total between 2011–12 and 2014–15. In contrast, the first three years of recovery in the early 1980s and early 1990s saw median income grow by 9.2% and 5.1% respectively.

Household consumption has also been very slow to recover by historical standards. Consumption per head of non-durables (things such as food and fuel that are bought and consumed roughly straightaway) was 3.8% lower in 2014Q3 than in 2008Q1. At the same point after the 1980s and 1990s recessions, it was 14.4% and 6.4% above pre-recession levels respectively. This might reflect households’ perceptions that their income prospects have been permanently damaged by the crisis and that a significant cut to their spending is therefore required.

Assuming all households face the same inflation rate, income inequality is lower in 2014–15 than it was in 2007–08. This is explained by changes between 2007–08 and 2012–13, when earnings fell relative to benefits. Since 2012–13, incomes are projected to have fallen towards the top and bottom of the distribution but risen across the middle, in line with the distributional impact of recent tax and benefit reforms.

However, low-income families have faced higher-than-average inflation since 2007–08. This is mostly due to price changes in the period up to and including 2009–10: these families were hit harder by rising food and energy prices, and benefited less from falling mortgage interest rates. When this is taken into account, the changes in real incomes between 2007–08 and 2014–15 look similar across most of the income distribution.

The incomes of older individuals have caught up with those of the rest of the population in recent years, while living standards have fallen the most for young adults. After adjusting for group-specific inflation, median income among those aged 60 and over is projected to be 1.8% higher in 2014–15 than in 2007–08, compared with a 2.5% fall for those aged 31–59 and a 7.6% fall for those aged 22–30.

In the long run, policies that spur productivity growth will have the most significant effect on living standards. Over the course of the next parliament, the choices that the next government makes about the shape and size of any further fiscal consolidation will also affect how the living standards of different groups change.

This briefing note forms part of the IFS election 2015 analysis, funded by the Nuffield Foundation.